Asish K Bhattacharyya: Will Voluntary Guidelines be beneficial?

The National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business and CSR provisions in the Companies Bill, 2012, will benefit companies more than beneficiaries

Who all will benefit from the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVG) and CSR provisions in the Companies Bill 2012? Answering these questions requires understanding important changes that have occurred over the past few decades. Re-balancing of relative bargaining powers of stakeholders has occurred — collective bargaining power of weaker sections of the society has increased manifold with the emergence of strong civil society groups which play an important role in protecting human rights and interests of marginal and vulnerable sections of the society. Media has assumed the role of watchdog to ensure that violation of human rights and wrong doings of companies do not go unnoticed. Judicial activism has assumed a new peak to ensure that those who are guilty of violating human rights and laws of the land are punished. With all these changes companies are increasingly finding it difficult to run business clandestinely or to pass on the cost of operation (e.g. adverse socio-economic impact) to the society in general.

Another change that has occurred over the last couple of decades is the enhanced societal expectations from large companies. In past communities had expectations that business activities would generate direct and indirect employment and living would improve. Before opening up of the economy, employment generation was one of the important business objectives. Government policies encouraged companies to choose labour intensive processes. Now companies choose the best technology and optimise utilisation of resources to compete globally. As a result, capital-labour ratio has increased and scope for employment of unskilled individuals has gone down sharply. Companies willy-nilly take initiatives to impart skills through training as a solution to shortage of required skills. They complement the government initiatives to improve the school education as skills can be imparted to only those who have the basic education. In the process, they touch the lives of the local communities and earn goodwill and support from them. Some companies (e.g. those operating in the IT industry) also create market for their products and services. Initially, only a few companies, in their own interest, initiated activities that they labelled as corporate social responsibility (CSR) initiatives. CSR initiatives by those companies caught the attention of civil society activists. They on behalf of local communities demand such initiatives by every company. Many companies have responded to the demand to buy peace with local communities and to present themselves as good corporate citizens. However, most of them do not report CSR spending. A plausible reason is that the numbers are not impressive. Therefore, many believe that, except for a few business groups, CSR initiatives lack commitment.

Against this backdrop it appears that the CSR provisions in the Companies Bill 2012 will significantly benefit companies. In a way, the provisions limit ever-increasing demand on companies to spend a significant amount on CSR activities. The amount (two per cent of average net profit of previous three years) has been established after due public consultation. It is expected that the provision will make civil society activists happy. Moreover, companies will not be required to spend the total amount on CSR activities because the list of CSR activities provided in the Bill includes activities related to environmental sustainability. Environmental responsibilities and social responsibilities should not be grouped together. Environmental responsibilities are to restore the environment damaged by the product and processes and to reduce further damage to the environment. Companies should necessarily bear those costs. Social responsibilities include minimising the adverse socio-economic impact of products and processes and making the living better through community development. The company should borne the cost of minimising adverse socio-economic impact. Only community development activities should be considered as CSR activities. Therefore, provisions in the Bill will not create any hardship to companies will be required to spend only a small amount on CSR.

NVG is the code of conduct for companies. Multinational companies and other leading companies across the globe have adopted similar codes. Consequently, in the near future, companies that will adopt NVG will only be included in the global supply chain of those companies.

Moreover, new market segments, which buy products and services at a premium from companies that adopt NVG, are emerging. Companies that will adopt NVG early, will be able to take advantage of this emerging opportunity. NVG also provides parametres to evaluate performance of companies. Therefore, it will protect managers from misguided criticisms from shareholders and other stakeholders. Thus, adoption of NVG will provide huge benefits to companies.

In conclusion, NVG and CSR provisions in the Companies Bill 2012 will benefit companies more than beneficiaries.

Affiliation: Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), The Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited.

Email: asish.bhattacharyya@gmail.com